Should Plan Sponsors Adopt the New Mortality Tables?
On October 27th, the Society of Actuaries (SOA) released the RP-2014 mortality tables and corresponding MP-2014 mortality improvement projection scale. Since their release, there has been much debate about the appropriateness of adopting these mortality tables for upcoming financial disclosures. (Note this is exclusively an accounting exercise currently as the mortality tables used for minimum funding purposes, AFTAP certifications, and lump sum payments are controlled by the IRS.) Adoption of the new tables can be an increase in liability for a plan of anywhere between 4%-11% based on demographics and the current assumption being used.
First, to dispel any myth, the SOA is not requiring any actuary to use a form of the new tables. The actual report from the SOA simply “recommends consideration” of the new tables. This is a far cry from a mandate.
When deciding if a plan
sponsor will adopt the new tables, several factors should be considered. Some plan provisions would make the adoption of the new tables somewhat of a moot point. For example, a plan that pays lump sums (assuming you are reflecting the government mandated unisex table in such a case), the impact will be minimal as the table used for lump sums is not changing at this time. For cash balance plans, because the benefit is calculated as an account balance and not as a life annuity, extending life expectancy is largely irrelevant.
Another facet to consider is the demographics of your plan. The new mortality tables are showing a bigger increase in cost for women as their life expectancy outpaced men. For plans that employ a union or industrial workforce, use of one of the sub-tables, such as the Blue Collar Mortality Table, probably makes more sense.
The current mortality assumption and the length of time since the last assumption update can also be factors in the discussion. For example, if the mortality table was just updated last year, or if you are already using RP-2000 with Projection Scale BB, this was a data set that is much more widely accepted compared to the RP-2014 tables and the general skepticism surrounding them. Furthermore, if you are using the PPA mortality tables for your accounting assumption to have them match your funding assumptions for simplicity, the funding assumptions will not be changing for at least one, and probably two years. Some plan sponsors may look to switch to the funding mortality assumptions to avoid conflicts. They would simply update the assumption if and when the IRS adopts the tables.
Some plan sponsors will look to an actuary to provide the demographic results for the last few years with regards to the mortality assumption. While this can be a helpful guide, it is important to note that most plans lack enough data to be truly credible sources of information.
The release of the new RP-2014 tables has raised a lot of new questions. Plan sponsors would be wise to work with their actuary in advance to come up with recommendations for the auditor ahead of year-end to address the issue directly and before any reports are issued.